The Fed’s Pause and the Government’s Peril: What’s Next for the U.S. Economy?

4 min read

Welcome to today’s analysis, where we break down the Federal Reserve’s recent decision to pause interest rate hikes and examine the growing probability of a U.S. Government shutdown. These events, occurring simultaneously, could have significant implications for both the U.S. economy and the stock market. Let’s delve right in.

The Fed’s Calculated Pause on Rate Hikes

While the Federal Reserve has taken its foot off the pedal concerning interest rate hikes, signals suggest another increment could be in the offing before the year ends. With 12 out of 19 officials leaning towards one more hike, the stage seems set for an eventful close to the year.

Jerome Powell’s Transparent Views on Inflation

Federal Reserve Chairman Jerome Powell was unambiguous on the subject of inflation, stating that the central bank is “prepared to raise rates further if appropriate.” He expressed the Fed’s commitment to hold policy at a restrictive level until there is sustained movement towards their inflation objectives.

When Reuters asked Powell if the economy was in for a “soft landing,” he responded with a decisive “No,” emphasizing that there are factors beyond the Fed’s control. This moment of transparency is rather unusual for the typically guarded institution.

The Balancing Act and Economic Projections

Powell also highlighted the Fed’s ongoing efforts to trim its balance sheet, aiming to cool down the economy by reducing liquidity. Several external factors, like a 30% increase in oil prices since June, the ongoing UAW strike, the potential government shutdown, and the reactivation of student loan payments could contribute to an economic slowdown.

By the end of 2024, the Fed anticipates the federal funds rate to reach 5.1%, a notable uptick from the previous estimate of 4.6% in June. Economic growth is expected to decelerate to 1.5% by 2024, following a 2.1% growth rate in 2023.

The Shaky Terrain of a Potential U.S. Government Shutdown

A government shutdown is becoming increasingly likely as Republican leadership opted to postpone a vote on a funding bill aimed at keeping the government operational through October. Party disputes between moderates and ultra-conservatives have complicated the matter. Speaker Kevin McCarthy faces a daunting deadline of October 1 to garner sufficient votes for a new spending bill.

What Happens During a Shutdown?

In the event of a shutdown, non-essential government functions cease, while essential services like air traffic control, military, and federally-funded hospitals continue to operate. Social security and Medicare programs would remain unaffected, but disruptions in services like passport processing, national park closures, and limited SEC oversight could occur.

Economic Ramifications

The 2018-2019 shutdown cost the economy $11 billion and affected 800,000 employees. While most of that sum was later recouped, $3 billion was gone for good. Goldman Sachs warns that a repeat performance could shave off 0.2% from U.S. economic growth per week, possibly influencing the Fed’s future decisions on rate hikes.

Concluding Thoughts

Both the Federal Reserve and the U.S. Government are walking on economic tightropes. While the Fed seems cautiously optimistic, pausing rate hikes, the looming government shutdown adds another layer of uncertainty to an already volatile situation.

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